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Johannesburg - A study submitted to the ANC to reform its
vital mining sector proposes a 50% tax on profits and rejects nationalisation
as an “unmitigated disaster”.

Although it delivers a hammer blow to calls for
nationalisation by radical elements in the ANC, mining houses will be wary of
the tax proposals as they grapple with steeply rising labour, power and safety
costs in the world’s largest platinum producer.

South Africa has a poor track record of translating its vast
mineral wealth into broader prosperity and the government is under pressure to
create badly-needed jobs in the industry without scaring off the investment it
needs.

“Under the current fiscal regime our nation is clearly not
getting a fair share of the resource rents generated from its mineral assets,”
an official summary of the 600-page study obtained by Reuters said.

“A Resource Rent Tax (RRT) of 50% must be imposed on all
mining. It will trigger after a normal return on investments has been achieved,
thus not impacting on marginal or low grade deposits.”

The study defines a resource rent as “the difference between
the price at which a resource can be sold and its extraction costs” - in other
words, profit.

R1 trillion price tag

As expected, the study, which was compiled after research
trips to 13 countries ranging from Chile to Australia to Venezuela, flatly
rejects nationalisation, mainly on cost grounds.

It put a R1 trillion price tag - almost as much as South
Africa’s annual budget - on acquiring all listed and non-listed mining
companies in the country.

An asset grab without compensation against an industry that
accounts for 6-8% of South African GDP would be even worse, the report
concludes.

“Nationalisation without compensation ... would result in a
near collapse of foreign investment and access to finance. This route would
clearly be an unmitigated economic disaster for our country and our people,” it
says.

The document says new taxes raised, which it estimated at
R40bn at current prices, should be ploughed into a sovereign wealth fund that
could be used to temper appreciation of the rand during commodity booms.

Once the resource rent tax is imposed, mineral royalty rates
should be cut to one percent from the current sliding scale system, which caps
royalties at 7%.

Tax havens

The study also proposes a clampdown on the use of tax havens
by foreign mining investors - a practice that activists say bleeds capital from
poor countries, especially those that rely heavily on mining.

“Many international mining companies invest in Africa via a
subsidiary registered in a ’tax haven’,” it says.

“To encourage direct investment from their primary listing
country, we should introduce a mineral foreign shareholding withholding tax: if
the foreign mining company is held in a ’tax haven’, then rate should be 30%
and if not, the normal rate of 10% should apply,” it says.

The study deals a potentially fatal blow on the push for
mine nationalisation, which had already lost political momentum due to ANC
disciplinary charges against its biggest advocate, Youth League leader Julius
Malema.

Malema was found guilty of sowing discord in the party by an
internal tribunal in November and was sentenced to a five-year suspension.

Below are details of some of the key proposals in the study:

RESOURCE RENT TAX

A resource rent tax (RRT) of 50% should kick in once an
investor has made a “reasonable return.” It should therefore not hit marginal
or low-grade deposits.

“Resource rent” is defined as “surplus value” or “the
difference between the price at which a resource can be sold and its extraction
costs, including normal returns.”

MINERAL ROYALTIES

In light of the resource rent tax, mineral royalties should
be reduced to 1% of revenue, provided the government is compensated equally
through income from the tax.

The current mineral royalties system operates a sliding
scale, with levies capped at a maximum of 7%

SUPER MINISTRY

A “super ministry” should be set up to oversee the sector,
as well as the development of other, related parts of the economy, including
mining services and downstream industries such as ore processing and smelting.

The new entity would be made up of units from the
Departments of Trade and Industry, Mineral Resources, Energy, Public
Enterprises, Economic Development and Science and Technology.

TAX HAVENS

If a foreign mining company is registered in a tax haven, a
mineral foreign shareholding withholding tax of 30% percent should be
introduced. Otherwise the normal rate of 10% should apply.

STATE MINERALS COMPANY

A state-owned miner should be created to develop minerals
deemed “strategic.” It should supply them for the domestic market at
competitive prices.

STRATEGIC MINERALS

Minerals used for manufacturing, power production,
agriculture and infrastructure should be declared strategic and supplied to the
economy at prices allowing for a reasonable return or at export parity.

MINERAL RIGHTS COMMISSION

A body should be established to audit existing rights and to
regulate the granting and administration of future rights. The commission would
also be responsible for deciding which minerals are strategic.

CARBON TAX

A putative carbon tax would be extremely damaging and should
be put on hold. The tax could be reconfigured by having a higher resource rent
tax than the proposed 50% linked to carbon emissions.

SOVEREIGN WEALTH FUND

A sovereign wealth fund could be set up to invest in
long-term projects that will ensure economic prosperity beyond the depletion of
mineral resources. The fund could be funded through income from the resource
rent tax.

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